The question whether or not a given consumption policy is sustainable is closely linked to the way in which nature assimilates pollution and how pollution affects life on earth. In this paper, an assimilation function is specified that is founded on the natural sciences literature. Hereby, the possibility of a break down of the life support system of the earth is explicitly taken into account. It is concluded that an optimal consumption policy need not be sustainable in a physical sense, i.e. the break down of the life support system cannot always be attributed to a market failure. In the model I consider a kind of externality that cannot be linked to any specific variable in either the utility or production function. It means that in some cases a traditional pigouvian tax alone cannot correct for the externality. This has to be done by making use of an extra tax instrument, the overendowment tax.
|Number of pages||18|
|Publication status||Published - 1994|
|Name||CentER Discussion Paper|
- Sustainable Development
- economic development